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Regulation and Compliance > Federal Regulation > SEC

SEC Aims to Shake Up Exchanges' Market Data Domination

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The Securities and Exchange Commission has proposed ways to update and expand content and data access for National Market System stocks and “introduce competitive forces … for the first time,” the regulator said Friday, adding that the NMS rules date to the late 1970s. 

It could likely do just that, according to Phil Bak, CEO of Exponential ETFs.

“Wow! SEC moves to break exchange control over stock market data. This is going to be a massive hit to NYSE and Nasdaq, and it’ll be a significant boon for fintech and data companies,” Bak said on Twitter.

According to SEC Chairman Jay Clayton, the proposals “would enhance transparency and ensure that improved NMS market data is available on terms that are accessible to a wide variety of participants in today’s markets,” via the possible inclusion of broker-dealers and other players. 

But there could be some downsides to the changes. 

Michael Graub of Principal Family Office responded to Bak’s tweet, saying “Eventually software disruption eats rent seekers.”

This prompted Bak to explain: “Hot take, and somewhat fair, but this is going to completely tank the exchanges and I don’t think that’s a good thing. Fact is that our market structure is the best in the world, even if too complex, and I worry about unintended consequences of losing exchanges as advocates.”

In an interview with ThinkAdvisor, the ETF executive pointed out that “open and closing auctions have been a key source of revenue, along with ETF trading and sales of market data” to the exchanges. Plus, the exchanges have seen their participation in overall trading revenue “decline for some time …, and equities can trade anywhere.”    

Along with recent changes to closed-auction exclusivity, the latest proposed market-data rules “could have a big impact on the exchanges’ revenue model,” Bak said. ‘

He admits that “when you have losers, you have winners, too,” as change occurs. “We could be moving to a model with information and data more readily available …. If the proposal moves us there, it should be good for the market, as long as the exchanges remain viable stewards of the market structure.”

‘Competing Consolidators’

At present, the national securities exchanges and the Financial Industry Regulatory Authority act jointly under three NMS plans (or Equity Data Plans) to collect, consolidate and share data on NMS stocks. They provide that data to exclusive securities information processors (SIPs), which then consolidate that information and pass it on to the public. 

The SEC aims to reduce “the current disparity in content and latency between NMS market data and the proprietary data products that some of the individual exchanges sell directly to market participants.” 

In effect, its proposal would replace the “exclusive SIP” model with a decentralized model of “competing consolidators.”

It comes on the heels of the SEC’s October 2019 proposal to improve the procedure for public comment and review of proposed fee changes by NMS plans, along with an order proposed in January to address conflicts of interest in the governance of NMS plans and let investors and other organizations participate in NMS plan governance. 

The new proposal will be published soon on and in the Federal Register, followed by a 60-day comment period.

Proposed Changes

First, the latest proposal would update and expand the content of NMS market data to include information on orders: (1) in share amounts smaller than the current “round lot” size (e.g., 100 shares) for higher priced stocks; (2) outside of an exchange’s best bid and best offer (i.e., certain depth of book data); and (3) that participate in opening, closing and other auctions.

Second, the proposal would introduce a decentralized consolidation model through which competing consolidators, rather than the existing exclusive securities information processors, could collect, consolidate and disseminate certain NMS information. 

For this decentralized model, the proposal would require each self-regulatory organization, like FINRA and the exchanges, to make available all data needed to generate NMS market data in two new categories of entities: (1) competing consolidators responsible for collecting, consolidating and disseminating consolidated market data to the public; and (2) self-aggregators, brokers or dealers that elect to collect and consolidate market data solely for internal use.

“SROs, as currently registered, and non-SROs could operate as competing consolidators,” the SEC explained. “SRO competing consolidators would not be required to register separately with the Commission. Non-SRO competing consolidators would be required to register with the Commission under proposed new Rule 614 of Regulation NMS.”

Plus, the new competing consolidators would have to meet certain standards tied to promptness, accuracy, reliability and fairness in their operations. Also, self-aggregators in the new framework would be registered broker-dealers — subject “to the full broker-dealer regulatory regime” but not required to register with the commission “in a separate capacity,” the SEC says. 

— Check out SEC Commissioner: Time to Reassess BD Best Execution Obligations on ThinkAdvisor.


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